The global fight against financial crime is high on our agenda and Refinitiv remains committed to raising awareness about the pervasive nature and devastating effects of this type of crime.

Our global survey in March 2018 analyzed responses from over 2,300 senior managers and c-suite professionals across 19 countries.

It revealed that respondents had spent an average of 3.1 percent of annual turnover trying to prevent financial crime during the preceding year. Despite this, nearly half (47 percent) had fallen victim to at least one form of this crime over the same period.

Robust due diligence and screening remains the best defense when fighting financial crime, but survey data also pointed to significant gaps in formal compliance.

For example, 41 percent of respondents had never screened their third-party vendors, suppliers or partners; and just 36 percent are screened on an ongoing basis.

These gaps must be addressed, but vast third-party networks mean that often overstretched compliance departments need easier, more efficient ways to transform their screening and remediation.

Enter API technology, which offers a fresh approach and allows cutting-edge solutions to integrate seamlessly with in-house compliance workflow systems to help professionals work smarter.

The benefits of using APIs

Whilst there is no substitute for human ability, the right technology can free compliance professionals from performing tasks that are often low value, repetitive or overly time-consuming, allowing them to concentrate on the higher value-add aspects of performing robust KYC.

API technology can deliver a host of benefits in some key areas, because APIs:

Are cost-effective.

Speed up processes, therefore improving time to revenue and ultimately offering a better customer experience.

Given these significant benefits, it is no wonder that APIs continue to gain in popularity. Cloud perceptions are also impacting attitudes to artificial intelligence (AI) in general and to cloud-based APIs in particular.

Our latest ‘Public Cloud Survey Report’ highlights that the benefits of the public cloud — agility, elasticity, speed and on-demand availability, for example — are beginning to outweigh the security concerns of the past.

Tools for fighting financial crime

Following the 2017 launch of our World-Check One API, which offers next generation screening capabilities and streamlines KYC processes through the use of API technology, we were excited to announce that Japan’s Sumitomo Mitsui Banking Corporation adopted the API in 2018.

The API was selected by the banking giant to help strengthen its due diligence procedures.

Available through a dedicated URL, this innovative, cloud-based API is a lightweight-but-effective tool specifically designed for once-off customer screening. It is for single payments or transactions, with no tracking or ongoing screening and with no permanent record of the search.

How to work smarter in 2019

Looking into 2019, we expect demand for APIs to continue to grow, and Refinitiv will continue to embrace this technology and work to ensure that our clients benefit from our commitment to ongoing innovation.

The many benefits delivered by API technology will ensure continued popularity.

An expected acceleration in public cloud take-up should also further boost the ability of compliance teams as they move away from outdated processes and look to work smarter in 2019.

From the World Economic Forum at Davos through to trade tensions and the soccer World Cup in Russia, how did Eikon apps and tools cover the major events in 2018?

Global markets

In the year that marked the centenary since women were given the right to vote in Britain, the 48th World Economic Forum Annual Meeting from Davos was for the first time co-chaired by an all-women panel.

The theme — “Creating a shared future in a fractured world” — gathered leaders from all walks of life to discuss how international collaboration could solve global challenges, spanning climate-change, terrorism, inequality, trade and much more.

The [DAVOS] app in Eikon offered a unique vantage point on all the developments, with real-time access to breaking news from the event and a library of event-related charts from Datastream in collaboration with Fathom Consulting. Relive the front-row seat experience.

The Davos app

In Eikon Messenger, the Global Markets Forum community members were offered the unique opportunity to participate in live-chat sessions with WEF guests on a variety of issues including the biggest risks facing the world in 2018 — cyber attacks, extreme weather events and escalating concerns around the China-U.S. trade conflict.

Trade Tensions

Global trade tariffs have seen a particularly eventful year, with the U.S. extending tariffs on steel and aluminum back in May, proposing the elimination of others at the G7 summit, and then using tariffs to start what some have described a “trade war” with China.

The value of bitcoin crashed to its lowest level this year, with many mainstream investors steering clear due to concerns over poor regulatory oversight and undeveloped market infrastructure, compounded by price volatility.

Our [CRYPTO] FX guide showcased all the crypto coverage, including real-time BTC/USD spot prices from the Bitstamp and itBit exchanges, prices and key data for new BTC futures contracts, and cross-rates for bitcoin and other cryptos.

The guide also included news and developments from Reuters and other sources.

Crypto app

Politics

The political calendar featured elections coverage in our Decision LatAm app [ELEAT], with the three biggest countries in Latin America all electing new presidents.

In Italy, within our Decision Europe app [DECEU], we covered the tense three months of negotiations ahead of the coalition agreement.

Our Decision Africa app also expanded as 20 African countries elected their leaders this year, including Zimbabwe in its first election without Robert Mugabe since independence in 1980.

The Decision Africa app

Brexit

2018 has been an annus horribilis for Prime Minister, Theresa May, negotiating a Brexit deal that both Britain and the EU will find acceptable whilst battling with multiple resignations from her cabinet, and growing public pressure peaking with hundreds of thousands of people marching through London demanding a second referendum.

Our [BREXIT] app followed the highs and lows, curating unrivalled news and exclusives from Reuters and presenting relevant currency and other market data in an easily consumable chartbook through our partnership with Fathom Consulting.

The Brexit app

Trump administration

U.S. politics seems to never have a dull moment under Donald Trump.

Highlights included the U.S. withdrawing from the United Nations Human Rights Council, lifting and re-imposing sanctions on Iran, and holding a summit with North Korea. There was also the hotly contested mid-term elections.

Our [TRUMP] U.S. politics app gave a comprehensive overview, including dedicated pages on immigration, healthcare, the environment and policies. There were also Reuters/Ipsos opinion polls, analysis and commentary for users to monitor market activity following each development.

From the doping scandal of the Russian curling team, to a dramatic hockey game between U.S. and Canada, our Winter Olympics 2018 app covered it all, bringing together the top stories, analysis and commentary from Reuters alongside relevant market data and video content to deliver the richest multimedia experience.

The Winter Olympics 2018 app

Road to Russia

Over the summer, football interest reached fever pitch and our “Road to Russia” [WCUP] app proved to be just the tonic. Eikon users enjoyed a unique vantage point of all the games, ranging from on-the-ground reporting from Reuters journalists, stunning photography, video clips of memorable moments and real-time data from tournaments past and present.

On Eikon Messenger, the Global Sports Forum re-opened to much fanfare, offering the chance for members to ‘chat live’ with special guests, pundits and peers, and weigh-in on hotly contested issues such as VAR, goals and the transfer window.

The “Road to Russia” [WCUP] appCompetition was also fierce among GSF members keen to showcase their football knowledge via our daily quiz and enjoy a chance to win an international jersey of their choice.

With all these Eikon apps and tools, users had easy access to the latest market and economic data, news and analysis, helping them to navigate political uncertainties and make informed decisions. Simply type the app name into your Eikon search to access them.

]]>Market Voice: Is 2018 ending with a flattening bang?https://perspectives.refinitiv.com/future-of-investing-trading/market-voice-is-2018-ending-with-a-flattening-bang/
Mon, 17 Dec 2018 15:53:13 +0000https://perspectives.refinitiv.com/?p=30886The interplay of negatives for growth with the positives for rates is manifest in a flattening of the yield curve. …

The interplay of negatives for growth with the positives for rates is manifest in a flattening of the yield curve. A key factor in this week’s market selloff is that as shown in figure 1 from the Tradeweb rates view in Eikon one point of the curve, the 2Y vs 5Y US Treasury spread, has inverted. There is a conventional view that yield curve inversion is a precursor of a recession and a bear trend for equities. Recent experience gives credence to this belief; as shown in the accompanying chart, the 2vs5 spread inverted ahead of both the dot com bust as well as the Great Recession. But we believe that it is too soon to start looking for a major market downturn on this basis, in part, because the prior inversions were more pronounced extending out to the 10Y part of the curve. So far, the 2Y vs 10Y spread has not inverted. Moreover, the inversions in figure 1 emerged at least a year before the market went into recession. Indeed, in both cases the curve had dis-inverted by the time the downturn occurred. History suggests an inversion now is a reason for concern about 2020 not 2019. On the other hand, prior to the dot com bubble recessions accompanied by bear stock trends have emerged in the absence of an inversion so it cannot be ruled out that overly tight monetary policy, trade disruption or other shocks could trigger a recession.

Figure 1: U.S. Treasury Bond Yield Curve

Source: Eikon – Click on chart to request a free trial

Is the Fed more bark than bite?

Expectations of continued Fed rate hikes are buoying the front end of the yield curve and there is clearly concern that the Fed might overdo the tightening. But history suggests that while conditions are tightening there is still much room before rates are high enough to be a trigger for an economic downturn. The Fed began raising Fed funds off the zero floor at the end of 2015 and, as shown in figure 2 the rate reached 1.25% by the middle of last year. Since then a steady dose of rate hikes has taken Fed funds another 1% point higher. At the same time, the Fed has been reversing quantitative easing as it has not rolled over the roughly $30 billion average amount of Treasury bond holdings that are maturing each month – but the flat curve suggests this has had little impact on long-term rates. The market looks for more tightening next year though expectations have moderated recently from three 25 basis point hikes to only two. The moderation reflects growing perceptions that with global growth slowing, less tightening is required to constrain inflation and moderate growth and there are also concerns that the U.S. Administration’s focus on trade restrictions could also begin dragging on growth. In addition, Fed Chairman Powell in a recent speech made comments suggesting that Fed funds was close to a neutral level – e.g., neither providing stimulus nor constraint – and the Fed’s decision on hikes next year would be guided by the economic numbers – in contrast, the Fed this year clearly indicated they were on a steady quarterly rate hike path.

Figure 2: Market expectations and actual value of the Fed funds rate

Source: Eikon – Click on chart to request a free trial.

As already indicated, the market has reduced the amount of hiking expected for next year and, at this juncture, is not pricing in any hikes in 2020 so the market is pricing this tightening cycle to max out by the end of next year. The fact that the market is looking for rates to peak out by the end of 2020 implies that the Fed will have done enough – or other factors will slow growth – to reduce inflationary pressures. As noted above, much of the market worry revolves around the possibility that the Fed will push rates too far triggering economic recession.

Keeping it real

Figure 3 creates a filter on market performance and puts it into the context of the cyclical history of Fed interest rate policy. The focus in this chart is the real value of Fed funds – deflated by trailing year-over-year CPI inflation. A market downturn is specifically defined as two consecutive months where the SPX was down at least 10% on a year-over-year basis. The triangles on the SPX line in the chart indicate those periods when the consecutive 10% rule is satisfied. The rectangles denote the period from the prior market peak until the last triangle in a series of declines – i.e., an indication of peak to trough for a major market dip. The red line in the chart represents when the real Fed funds rate is above 150 basis points. The market declines since 1990 roughly align with figure 2 and in all three cases the real rate of Fed funds was well above 150 basis points. But unlike the curve inversion, the 150-point real fund barrier has been a key precursor of market downturns going all the way back to 1960. The only exception was the 1978 slump that was triggered by an OPEC manufactured surge in global oil prices and the responsive dip in the market occurred with real Fed funds still in negative territory. It should be noted that with the exception of 1978, real Fed funds above 150 basis points has been a necessary condition for a major market downturn – as defined by the 10% criteria – but is not sufficient. There have been years – especially in the 1980s – when the market trended higher even with real rates above 150 basis points. The key implication is that with real rates at roughly zero, history says there needs to be a significant combination of higher nominal rates or lower inflation before conditions are in place for a sustained decline in equity markets. For all the talk about Fed tightening and nearing neutral, by historical standards monetary conditions cannot be deemed even close to tight.

Figure 3: Real Fed funds rate and SPX market peaks

Source: Eikon

That said, there is modest risk that further deterioration in U.S. trade relations, particularly with China, could serve as a strong enough dislocation to trigger a major market decline and economic recession but this seems unlikely. Like a major move in oil prices, the trade disputes are apt to have major impacts for specific industries but there will be winners and losers so the net impact on overall growth should be modest. While the implication of comparative advantage suggests there is a net negative from trade disputes, this impact will take years to have a meaningful impact. In the short run, the most likely way trade distortions will be manifest at a macro level is in rising prices. But so far there has been no meaningful effect on inflation rates.

Cross market allocations raise some warning signs of trouble

Figure 4 compares U.S. portfolio manager allocations in global portfolios to stocks, bonds and cash. The most significant evolution has been an increase in allocations to cash instruments from a low of 1.8% in June 2017 to almost 6% at the end of November 2018. This is probably, in part, a reaction to higher short-term interest rates, but the move into cash largely came out of alternative assets – e.g., hedge funds – which likely also reflect the well reported sustained underperformance of Alternatives. More worrisome is the 2% shift of funds out of equities and into bonds. This is exactly the reallocation one would expect if the market was positioning for a peak in rates that would occur at the end of a Fed tightening cycle, so continuation of this trend might indicate that contrary to history, a bear market could develop in the absence of the historic interest drivers.

Figure 4: Portfolio allocations of U.S. Institutional Investors

Source: Eikon – Click on chart to request a free trial.

The patterns of credit spreads are also starting to show some signs of market stress. Figure 5 shows the SPX in conjunction with the spread between the maturity-weighted average of BBB corporate bond rates vs the U.S. 10Y Treasury rate. There is a long history of a link between credit spread widening (note the spread data in the chart is inverted) and declines in the equity market. More specifically, the spread tends to tread in a range of roughly 60 to 175 basis points and breaks above 175 and, especially, moves through 200 are generally associated with significant declines in the stock market. The spread is pushing the upper end of the range which is a warning sign that history may not repeat itself and we will see a bear market emerge without the prerequisite interest rate configurations. But at this point the spread is a reason for caution, but is not yet signaling a major downtrend in equities.

But the absence of a bear does not equal a bull. While we think the market is exaggerating the implications of Fed tightening and trade disruptions, growth is likely to slow which could negatively affect corporate earnings weighing on equity market performance. While it seems premature to look for an extended bear market, it also seems unlikely that the market will achieve significantly new highs. It could well be that the environment of the past two months of high volatility with little net movement could be indicative of what to expect in 2019.

Figure 5: SPX and BBB Corporate vs. US10Y Bond Rate

Source: Eikon

The Bottom Line

For all the talk of Fed tightening, by historical standards, monetary conditions are still not tight enough to signal the beginning of a sustained market decline. More specifically, a 2Y vs 10Y government bond inversion and Fed funds hitting 150 basis points in real terms are two prerequisites for sustained market downturns which have yet to be achieved and the downturn normally does not emerge for at least a year after these conditions are met. That said, there are some worrisome developments that should be monitored. The Refinitiv survey data indicates that there is a gradual shift out of stocks and into bonds by U.S. portfolio managers and BBB spreads over Treasuries are pushing against the top of the trading range. Continuation of the portfolio shift or the BBB spread breaking 200 basis points would warrant turning extremely cautious even if the general rate situation remains supportive. Moreover, there is some – though we believe modest – risk that if the renewed trade discussions between the U.S. and China do not bear fruit this could create enough disruption – like the 1978 oil crisis – to trigger a major market decline. But the absence of a bear does not equal a bull and it seems plausible that 2019 will see the continuation of a stock market with lots of volatility, but not much net change.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Refinitiv, or any of its respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

An integrated approach to risk management relies heavily on data analytics being able to offer new insight and transparency on how the company works.

The 3 lines of defense model of risk management has proven itself to be a reliable and adaptable strategy for corporates, making it easier to implement new technology.

Corporates are faced with an ever-changing and expanding set of risks. Those who protect their companies from these risks know that they must create a strategy and adopt new technology, but the breadth and complexity of the task can seem overwhelming.

Refinitiv recently gathered risk managers, auditors and compliance officers in Hong Kong to discuss how best to prepare for an uncertain future. They identified risks ranging from cyber attacks to interest rate uncertainty.

Many corporates see potential failures in regulatory compliance as a key risk, particularly as regulators now demand that corporates have risk management policies in place which provide a clear audit trail.

There is no easy, one-time solution. The best way to address the issue is to adopt a comprehensive risk management system of technology, procedures and clear lines of responsibility.

No one size or system design will suit all companies, so they need to find a solution that fits their needs and budgets.

“The way companies can protect themselves is to assess where their risks are and then have a process and system in place to manage them”, Katherine Ng, Senior Vice President and Head of Listing Policy at HKEX, told attendees.

Katherine Ng, Senior Vice President and Head of Listing Policy at HKEX. addresses the guests at the Refinitiv Breakfast Briefing in Hong Kong.

An integrated approach to risk management

Comprehensive, company-wide risk management systems can take years to approve, design and build, and it takes even longer to change human behavior around the adoption of new technology.

It is better to target key needs and issues and use each solution as a building block towards a comprehensive plan.

“It’s a huge undertaking to manage risk at an enterprise level — it requires specialized resources and considerable amount of time.

“Don’t try to do everything at once. Build your system piece by piece — connecting modules over a single connected platform, and always focusing on critical risks,” said Marcelo Hiratsuka, Head of Market Development for Risk at Refinitiv Japan.

IT departments that were once viewed as a necessary but non-core part of the business have today become the bedrock of every organization.

Forward-looking risk management systems increase the need for and importance of technologies such as AI, machine learning and big data, putting IT departments at the fore.

Effective risk management systems rely on data analytics, which require a company to collect data on all parts of its business. That data can also contribute to the core business, offering new insights and transparency into how the company works.

The 3 lines of defense model

Shared responsibility and control is just as important as technology when it comes to the communication and effectiveness required to run a successful risk management system.

The board of directors and business managers have distinct roles. The board must look at risks in general, and use its diversity and expertise to identify risks that the management may not see.

Executives and managers must implement the plan, monitor and analyze risks, and have an action plan for when their defenses have been breached.

The 3 lines of defense model of risk management has proven itself to be a reliable and adaptable strategy for corporates, making it easier to implement a new technology platform.

The first line of defense is implemented by the primary business unit in their daily activities, the second line is executed by risk management and compliance functions, and the third line of defense is auditors.

This strategy must be implemented throughout a company and made a part of corporate culture as well as corporate governance.

Demonstrating how a 3 lines of defense approach improves competitiveness is crucial to helping sell the strategy to shareholders, customers, executives and business partners who may resist the change.

Marcelo Hiratsuka, Head of Market Development for Risk at Refinitiv Japan, at the Refinitiv Breakfast Briefing in Hong Kong.

Efficient and effective risk management

It is important the 3 lines of defense find a common language to be shared between the IT, core business and risk management teams. Risks need to be measured and analyzed using the same metrics across the organization in order to gain the full potential of insights and control.

The better the integration between business units, the more efficient and effective a risk management system will be. It will be more efficient due to reduced duplication of tasks, resources and strategies, and more effective because integration enables organization-wide visibility, and gives managers the control they need to act.

With a 3 lines of defense approach, risk management is considered in performance appraisals, management structure and overall business strategy. It is imperative that the board of directors and executive suite set an example if all employees are to take responsibility for risk management.

Refinitiv’s integrated approach

A rapidly changing world demands that corporates improve their risk management strategies and systems.

Refinitiv’s experience helping clients across sectors has shown that an integrated approach to risk management creates a solid platform, which can then be leveraged and enhanced with new technology systems.

Piece by piece, Refinitiv helps clients build a defense system that prepares them for future uncertainties.

]]>MiFID II and a year of regulatory changehttps://perspectives.refinitiv.com/regulation-risk-compliance/mifid-ii-year-regulatory-change/
Thu, 13 Dec 2018 16:01:58 +0000https://perspectives.refinitiv.com/?p=30765Financial markets coped well with MiFID II in January, but it’s unlikely regulatory change will stop there as ESMA is …

Financial markets coped well with MiFID II in January, but it’s unlikely regulatory change will stop there as ESMA is voicing concerns about market transparency.

Other examples of regulatory change in financial markets during 2018 included PRIIPs and AnaCredit, as well the wider impact of Europe’s GDPR rules.

An area of focus in 2019 will be where the United States goes with its financial regulation, potentially causing a divergence from the approach in the EU.

A colossal year for regulatory change saw the introduction of MiFID II occupy the financial sector in 2018, while other regulations, such as GDPR, affected even the largest global organizations.

Inevitably, the Brexit debate continued with much speculation on the impact that leaving the European Union will have on the implementation of financial regulation in the UK, as well as the City of London’s relationship with overseas markets.

Cryptocurrencies also shot to prominence during the year, sparking plenty of commentary about how such assets should be regulated.

Ready for MiFID III?

It seems a long time ago now, but the morning of 3 January was met with some apprehension as we awoke to headlines such as “The Day of the MiFIDs” in London newspaper City A.M.

We await the Systematic Internaliser thresholds for derivatives in February, and of course we can’t ignore the consequences of what could happen if the UK exits European markets on a hard Brexit basis. Will ESMA publish or will they wait to revise?

We also know that MiFID II will be revisited. Already there is talk of MiFID III. With ESMA voicing concerns about market transparency, it appears a third instalment of this regulation may not be as far away as people think.

MiFID II wasn’t the only regulatory change, of course. The EU Regulation for PRIIPs (Packaged Retail Investment & Insurance Products) sneaked in under the radar in January, and then later in the year we saw GDPR and AnaCredit.

On the horizon, we can see FRTB and even though regulators seem uncertain on exactly what they’ll be asking for and when, there is no question that it will have a huge impact. We await the Basel committee’s response to its earlier consultation with interest.

Regulatory outlook for 2019

So what will 2019 have in store, in addition to the unquestionable cloud of uncertainty that is Brexit? Even though Brexit isn’t a regulation, its impact across Europe and beyond cannot be ignored.

We will most likely see venues that wish to remain MTFs, OTFs and APAs establishing legal entities in the EU, meaning that we will have additional MIC codes to deal with and potentially splits in liquidity.

The potential threat of parallel thresholds from ESMA and the Financial Conduct Authority (FCA) in the UK is also something that we will need to cater for in our market and reference data systems.

It may mean an actual reduction in trade reporting as the FCA has already said that instruments covered under the current waiver program will most likely not be reported during any transition period.

The U.S. and cryptocurrencies in 2019

The other fascinating area is going to be where the United States goes with its regulation.

With a fundamental philosophical difference between the U.S., which views liquidity as underpinning stable markets, and the EU, which regards regulation as underpinning stable markets, the potential exists for a divergence to appear between the two markets.

Where the FCA ultimately decides to take the UK market regulatory structure will be critical, I feel, to whether London keeps its current pre-eminent position.

Cryptocurrencies also have the potential to dominate the regulatory agenda over the next few years.

With cash markets being used less and less globally, and banks discussing the prospect of initiating their own digital currencies, regulators will have to wrestle with how and if they even allow these instruments to be traded within their jurisdiction.

If you think 2018 was the end of regulation, or even the beginning of the end of regulatory change in financial markets, think again.

]]>ETFs in Hong Kong: Looking beyond Chinahttps://perspectives.refinitiv.com/future-of-investing-trading/etfs-in-hong-kong-looking-beyond-china/
Thu, 13 Dec 2018 13:13:10 +0000https://perspectives.refinitiv.com/?p=30799The U.S. has retained its leadership position in ETFs AUM. In APAC, South Korea is leading with the highest number of …

In APAC, South Korea is leading with the highest number of ETFs, followed by Japan, China and Australia.

Unique and in-depth datasets are key to building and launching well-differentiated index-linked products quickly and in a cost-efficient way.

Given this development, Refinitiv hosted a workshop in Hong Kong for industry experts to review the outlook for the city’s ETF market, highlight the various challenges limiting growth, and outline opportunities, ideas and techniques to rejuvenate the sector – all with an eye towards helping the ETF market in Asia’s so-called ‘world city’ regain its leadership position.

Worldwide, ETFs continue to attract an outsized share of inflows, although AUM in passive funds remain a fraction of the size of active funds. The U.S. has retained its leadership position in AUM terms with APAC bringing up the rear, even behind Latin America, although AUMs grew across all regions. U.S. and Japan equity funds are attracting the most inflows while outflows mainly affect Europe and China equity funds.

In APAC, South Korea is leading with the highest number of ETFs, followed by Japan, China and Australia, according to Lipper. Hong Kong is in fifth place ahead of only Taiwan and India among the region’s major markets.

EFTs Casting a long shadow

One of Hong Kong’s biggest draws for foreign investors is its role as an access point to Mainland China’s massive capital markets. This role has only been magnified as China has pressed ahead with market reforms via a range of mutual market access programs, and as China stocks and bonds have earned inclusion in some global indexes.

On the other hand, even as the market reforms and index inclusions rouse interest in index-linked products, on the focus on offering ETFs investing in China’s markets to the exclusion of nearly everything else is a mistake that is hurting Hong Kong’s opportunity to become a regional hub, warned the panel discussing Hong Kong’s ETF market outlook.

The need to diversify

Pointing out that about two-thirds of ETF AUMs in the city are either related to Hong Kong or China or both, the panel argued for greater diversity in the ETF product range.

For instance, APAC has only seen 220 product launches in 2018 compared to 319 in North America. A greater variety of products, combined with Hong Kong’s tax advantage, can draw investors across Asia – a region with US$30 trillion worth of investable assets – away from other markets, especially the US, the panel noted.

There is significant potential for innovation and an opportunity to make the city as competitive as other ETF hubs in the region, panelists agreed. The proliferation of products in markets such as Europe and the US make it hard for them to innovate and bring new products to market, the experts pointed out. Fortunately, this is a problem that Hong Kong does not yet have, and issuers need not be overly creative to distinguish their offering.

The panel mentioned that Environmental, social and governance (ESG) and thematic (such as AI, Biotech, Batteries, etc.) ETFs have been the most popular type of products to be launched in 2018. Deborah Fuhr, managing partner at ETFGI, observed that there is an increasing number of studies showing a positive correlation between companies that embrace Environmental, Social and Governance (ESG) principals and stock performance, ultimately rewarding their investors.

Challenges to growth

The delay in the launch of the much-awaited ETF Connect, which is viewed as a potential aid to innovation and an ideal way for Hong Kong ETFs to become globally competitive, is also seen hindering growth. Investors are hedging their bets while they remain unsure of the types of products to develop for ETF Connect and await clarity around its scope.

It is also crucial to educate retail investors in the region and increase their participation, which currently lags far behind that of institutional investors, the panelists noted.

The panel also urged ETF providers and investors to be more accepting of fund closures and not view them as failures. Comparing the ETF industry to the IT sector, participants observed that the process of investing capital productively is a long and iterative one involving experimentation.

Leveraging Data Sets

In a session discussing the ideal ways to get a passive investment strategy to market, Philippe Shah, Director, Indices & Benchmarks Asia Pacific, Refinitiv, observed that access to unique and in-depth datasets are key to building and launching well-differentiated index-linked products quickly and in a cost-efficient way.

Refinitiv, Shah pointed out, can help in this regard by allowing ETF providers the ability to develop their own unique methodologies using global pricing and analytics datasets, and have Refinitiv calculate, administer and distribute these indices on their behalf.

Summing up the overarching message from the workshop, Simon Lee, Head of Institutional Business, CSOP Asset Management, said: given our collective ETF know-how & experience in Hong Kong, “…we have a significant advantage over our competitive ETF jurisdictions in Asia. Let’s make the most of it.”

Although ESG in Asia is gaining traction, the pace of change is piecemeal as investors often lack the data — or the regulatory pressure — to make decisions with an ESG lens.

With 35 percent of the region’s wealth set to change hands in 5-7 years, the next generation of socially conscious investors will be key to the rise of sustainable investing in Asia.

Our ESG data and indices cover more than 1,100 companies in Asia, and have been used, in partnership with BlackRock, to launch the industry’s first inclusion and diversity ETF.

Globally, more than a quarter of financial assets under management come with a mandate to incorporate Environmental, Social and Governance (ESG) factors, driven predominantly by European investors, companies and regulators.

During a panel discussion I led at the recent 2018 Pan Asian Regulatory Summit in Hong Kong, we surveyed senior risk and compliance professionals on the influence ESG had on their role. Only four percent indicated that ESG made up a large portion of their responsibilities, with 51 percent stating it was not a focus in their job at all.

The ESG landscape in Asia

Investors in Asia tend to believe they must choose between either “doing good” or maximizing profits. Meanwhile, the region’s private investors and family-run firms often prioritize philanthropy and charitable foundations as a primary means to deliver social impact.

The region is also home to many emerging and frontier markets where investors have traditionally zeroed in on growth and short-term profits. In addition, companies often don’t have the resources and expertise to interpret the data and differing standards on ESG.

These issues are underscored by the lack of repercussions for corporate inaction on ESG when compared with other countries, particularly in Europe. Fortunately, there are signs that regulators and influential investors are aligning their focus to the importance of sustainable investing in Asia.

Watch: What regulatory change will have the biggest impact on financial markets in Asia?

Socially conscious investors

Business leaders and investors are concerned that issues such as climate change, diversity, geopolitical instability and income inequality will pose equally significant, if not greater, challenges to companies’ long-term prospects as economic growth rates.

To prosper in this complicated environment, companies need to, as BlackRock’s Larry Fink put it in his annual letter to CEOs, “not only deliver financial performance, but also show how it makes a positive contribution to society.”

The pressure for companies to serve a social purpose is just as acute in Asia as elsewhere.

Investing with an ESG lens

Newly-devised data sets and tools are making it easier for investors to make more responsible investment decisions, and for financial institutions to offer bespoke ESG products.

Refinitiv has collated ESG data and scores on more than 70 percent of global market capitalization and history, dating back to 2002, including over 460 companies in Japan and more than 700 in the rest of Asia.

Company ESG view in Eikon

The data was used to compile a range of indices, including the Global Diversity and Inclusion Index, which identifies the top 100 publicly traded companies with the most diverse and inclusive workplaces, and to launch, in partnership with BlackRock, the industry’s first inclusion and diversity ETF.

While Asia’s landscape might not be as mature as Europe, there are signs the region’s companies and financial institutions are beginning to take ESG very seriously.

The ESG app in Eikon

Even in China, which has in the past been considered one of the more challenging markets for investors, a senior official from a major Chinese investment management firm has recently stated that “ESG is no longer a secondary, but the primary screen.”

This important statement gives me confidence that in the next few years we are likely to see the business and investment case for ESG grow deeper roots, heralding the dawn of a new era for sustainable investing in Asia.

The ESG peer view in Eikon

Incorporating ESG into risk management

As I spend more time personally focusing on the issue of ESG, I realize that it is not just limited to social impact investing, but is increasingly an important factor for effective corporate governance and risk management.

Considering that a negative environmental or social footprint can send companies’ stock prices on a downward spiral, investors and risk officers need to take ESG criteria into account when calculating investment and supply chain risks.

At Refinitiv, we see the lines between our ESG and Risk propositions being drawn more closely together as ESG becomes a deciding factor in both investment and risk management.

]]>Will high European carbon prices last?https://perspectives.refinitiv.com/market-insights/will-high-european-carbon-prices-last/
Wed, 12 Dec 2018 10:15:44 +0000https://perspectives.refinitiv.com/?p=30756Our recent webinar looked at reasons for the 2018 surge in European carbon prices, and gave an outlook for the …

Our recent webinar looked at reasons for the 2018 surge in European carbon prices, and gave an outlook for the market impact of the reformed EU Emissions Trading System and forthcoming Market Stability Reserve.

European carbon prices have rallied since the beginning of 2018, up from €8/t in January to peak at €25/t in September with big price volatilities.

Going from 2019 until 2030, we forecast that EUA prices will average €23/t, with prices on average €24/t over the next five years.

Before considering the carbon market outlook up until 2030, let’s first take a step back and put a bumper year for European carbon into perspective.

At their highest, European carbon prices peaked at almost €30/t in 2008, and subsequently crashed on the realization that the market was heavily oversupplied due to the financial crisis and the inflow of carbon credits from outside of the EU, reaching a low of under €3/t in 2013.

As in other markets, the price is a function of supply and demand, but the EU ETS is far more influenced by politics, since it is basically a political instrument used to achieve climate change ambitions. The demand side fluctuates with economic activity and emissions in the sectors covered by the scheme, while the supply side is fixed upfront to ensure predictability for European industry.

In reaction to the market imbalance, policy discussions amongst EU regulatory bodies took place in order to ensure that the EU ETS could live up to its aspiration as the Union’s flagship climate instrument, with a dual aim to ensure that emissions targets were met and provide the right signal to trigger low-carbon investments.

From a slow recovery pathway during the policy processes to strengthen the system, the market once again experienced a drastic price decline in early 2016 and following the Brexit referendum before slowly starting to recover in early 2017.

Prices started in mid-2017 from a modest base and have since been going up aside from a few bearish glitches along the way.

The December European Union Allowances (EUA) contract has nearly tripled in one year and European carbon prices have rallied relentlessly since the beginning of 2018, aside from a slight decline in October, originally trading at €8/t in January, prices peaked at €25/t in September.

The Market Stability Reserve

We see the anticipation of the start of the Market Stability Reserve (MSR) from 1 January, 2019 as the main factor behind the bullish development primarily driving the EUA price rally.

The MSR introduces supply-side flexibility and will hold back 24 percent of the surplus in the market over its first five years of operation, curbing auction volumes by 40 percent.

A price reaction was expected as European policymakers agreed on the rules for the fourth trading period of the carbon market at the end of 2017 – in particular in light of the agreement to double the pace of the intake to the MSR.

However, the sheer price increase over such a short period of time far exceeded our expectations.

Originally forecast to reach €8/t in 2018, average prices for 2018 are set to at least double for the year.

The year also marked the re-entering of financials into the EU ETS to further accelerate the price rise, as has an observed front-running of utilities forward EUA hedging. In addition to this big appetite for EUAs, an overall bullish energy complex with a tight European gas market has lent further support to carbon.

Carbon Price Forecast 2019-2030

Going forward, in the period 2019 until 2030, we forecast that EUA prices will average €23/t, with prices on average €24/t over the next five years when the MSR works at double the speed with the market eying the annual supply crunch, triggering more abatement.

We are forecasting a gradual price decline from 2022 until 2027 due to two factors.

This declining price path reflects the dual effect of the MSR intake being halved to 12 percent from 2024 onwards, coupled with declining emissions due to an increased phase-in of renewable energy for power generation in line with Europe’s 2030 renewables ambition.

As a result, we estimate that the market surplus will be on the rise again after 2023.

In anticipation of higher abatement needs in industrial sectors moving towards 2030, we forecast prices to pick up in the final years of Phase 4 of the EU ETS, ending at approximately €26/t.

Alongside technology, banks desire for collaboration as they look to build common infrastructure meaning there’s greater confidence in the fight against financial crime.

As part of our fundamental commitment to raising awareness around financial crime, Refinitiv commissioned a global survey with the ultimate goal of revealing the true cost of financial crime.

We analyzed responses from over 2,300 individuals (100 percent senior management/C-suite), across 19 countries, and conducted interviews with leading NGOs to unpack the wider economic, social and humanitarian consequences of financial crime across the world.

Our findings revealed that respondents spent an average of 3.1 percent of annual turnover trying to prevent financial crime during the year preceding the survey, but despite this, nearly half (47 percent) had fallen victim to at least one form of this type of crime over the same period.

Our survey also revealed that a significant 94 percent of respondents are in favor of initiatives to share financial intelligence and information on specific cases and on compliance best practice.

But before meaningful collaboration can be achieved, there is more work to be done in terms of raising awareness of financial crime at both political and policy level.

To this end, Refinitiv, the World Economic Forum and Europol launched the Global Coalition to #FightFinancial Crime to raise awareness, promote public-private information sharing and to strengthen the current AML regimes.

Whilst these macro initiatives are critical on a global level, how can individual compliance teams win the fight against financial crime?

AI and the public cloud

Our financial crime research served to highlight the practical benefits of machine learning and artificial intelligence (AI) in helping over-burdened compliance teams meet their regulatory obligations.

Technology has become the key differentiator that sets successful compliance teams apart. Early adopters are reaping significant rewards and any remaining skepticism is waning.

For example, our latest ‘Public Cloud Survey Report’ reveals that the benefits of the public cloud (including agility, elasticity, speed and on-demand availability) are beginning to outweigh security concerns. Of particular interest, the report concludes that companies are specifically looking to the public cloud as ‘a means to deploy latest AI technologies’.

Refinitiv has addressed many key compliance challenges by applying these latest technologies.

Here are three practical applications of AI in 2018:

Technology in action

API provides a lightweight but effective solution, for one-time single name screening, against our industry-leading World-Check Risk Intelligence data to help inform your decision making process.Our API screens without creating neither a permanent external record of the screening results nor unnecessary processing of personal information.

Technology is also a key enabler when analyzing volumes of content, as so often required in the age of big data. Practical applications include:

The power of machine learning can be harnessed to identify entities and their relevance to content themes. This reduces false positives and enhances content results.

Intelligent tagging has the ability to enable document-level classification and structure content. Millions of text documents can be processed and people, places, facts and events can be tagged with scores to indicate relative importance.

New capabilities can eliminate article duplication, allowing users to focus on unique events rather than trawling through different versions of the same story.

Content can be grouped into events using text analytics. The functionality identifies and clusters similar articles related to an event/theme and the related entity name.

Best-practice advocates rigorous client screening, but this is often regarded as inefficient and time-consuming — a necessary bureaucratic layer that delays onboarding, increases time to revenue, and simultaneously harms the customer experience.

The right technology can help companies to quickly and efficiently onboard new customers and meet AML obligations. For example, World-Check Risk Intelligence can now be accessed on the Salesforce AppExchange with the World-Check Customer Risk Screener. This application improves customer workflows and reduces the costs and complexities of client screening.

A step back before looking forward

As 2018 draws to a close, it is worth remembering some key developments since the 2008 financial crisis.

Over the last decade we have witnessed an exponential rise in the value and overall number of digital currencies in use. The rapid growth in the popularity of bitcoin and other cryptocurrencies has inadvertently created new opportunities for financial criminals.

These currencies offer anonymity and have pioneered the use of a decentralized ecosystem for making financial payments, two factors that can be used to conceal illicit funds to further financial crime.

This same decade has also seen the fintech sector flourish, helping to modernize the financial industry, improve operational efficiencies and enhance the customer experience.

Alongside the emergence of enabling technology, we have also witnessed a growing desire for collaboration between banks as they look to build common infrastructure to improve the market for all stakeholders.

These two key trends have set the scene to give governments, regulators and individual companies greater confidence to tackle financial crime than ever before.

Looking ahead, growing international awareness of the true cost and impact of financial crime, coupled with more widespread take-up of enabling technology will further boost our collaborative efforts to fight the global scourge that impacts countries, companies, communities and individuals. Financial crime affects us all.

The financial services industry continued to see an increase in the volume and complexity of regulation during 2018, with more fines also being issued for non-compliance.

Throughout this period, technology has remained a critical component in helping firms better navigate the evolving business landscape. That was demonstrated in 2018 by the success of Connected Risk, our governance, risk and compliance (GRC) software platform.

Risk management technology

The key to this success has been in challenging outdated working practices and technologies.

Many organizations traditionally operate multiple risk processes on a range of differing technologies. This often results in different sets of risk outputs, and makes it difficult to consolidate, monitor and understand all the potential risks that exist at any one time.

Our Connected Risk platform offers a complete suite of solutions to cover the spectrum of risk management — Risk, Compliance, Audit, Regulatory Change, and Model Risk — helping to visualize and prioritize risks from all areas of the business.

Other 2018 award wins

The depth and breadth of our experience in empowering customers to understand and embrace risk with confidence spans decades. That’s why we are proud to see that Connected Risk has been awarded the following accolades throughout this year:

The Global Investor Group panel specifically highlighted the capability of Connected Risk to integrate with a client’s legacy solutions, the continued and targeted investment in product development, and the holistic view of internal and external data that it provides.

Technology for the here and now

While these solutions are effective in addressing isolated risk activities, they can’t always easily aggregate an enterprise-wide view of risk.

Risk professionals may face the unfavorable choice of either bridging the gaps with slow, manual and costly procedures, or accepting that some risk exposures may be overlooked.

Connected Risk aggregates, visualizes, and prioritizes risks from all areas of the business. By drawing your information, plus that from third-parties, into a single view of risk you can rank data using advanced mapping, and quickly move through your data with a system of tags, structures, charts, and a shared taxonomy.